What Made Contracts to Validly Exist - Assignment Example

INTRODUCTION Simply speaking a contract means an agreement, limited exclusively to those agreements which produce patrimonial obligations rather than family relations and this is the principal source of the rights and obligations of the parties in a contract. In the same manner the rights and obligations that arises from contract are certain and specific, existing only for a short time, and are limited. Contracts should neither be confused with perfected or imperfect promises. A perfected promise gives rise to a future contract, while an imperfect promise is tantamount to unaccepted offer. However, the growth of industrial revolution calls for a long term commercial relationships and laws have to be adapted and provide ways which business people could rely on commercial arrangements. Such need paves the way for the so called “doctrine of consideration”, and securing long term future commitments in business are made possible by “promises”, one which are legally enforceable. It is the objective of this paper to identify and determine what made contracts to validly exist and what promises that is legally enforceable and which are not. It shall also be provided in the paper how these promises constitute sufficient consideration and if such can be considered as good consideration in the modern commercial context. ELEMENTS OF A VALID CONTRACT For a contract to validly exist, the following pre-conditions must be present: offer, acceptance, an intention to create legal binding conditions, and consideration. These conditions are manifestations of the essential requisites of contracts that must be concurred which include: consent of the contracting parties; object of the contract; and the cause. Offer and Acceptance The offer must be definite and fixed and the acceptance must be completely unequivocal. Otherwise, a modified acceptance is tantamount to a counter-offer. In the case of Carlill v Carbolic Smoke Ball Co [1893] 1 QB 256 the Court held the following contentions with regards to offer and acceptance: “Generally, in order to make the contract binding it should not only be accepted but that the acceptance must be notified. However, if the offeror expressly or impliedly indicates that it will be sufficient to perform the acts requested in the offer without communicating that to him then performance of the condition is a sufficient acceptance without notification”.1 Offer can be terminated by the following means: revocation, rejection, failure to accept on time, death, and failure of a condition. If it is stipulated in the offer that the acceptance must be within the specified period then the lapse of time terminates the offer. Acceptance must be made within reasonable time if such is not provided. Clearly there is a very great difference between the effects of an option which is without a consideration and the effect of one which is founded upon a consideration as far as the right of the offeror to withdraw his offer or proposal is concerned. For acceptance to be effective it must be communicated and concur exactly with the offer these two should be “mirror images” of each other, any deviation renders it ineffective. In bilateral contracts this is not a problem since the reciprocal nature of the relationship is emphasized; however, in unilateral contracts an act is necessary to show performance of an obligation. Daulia Ltd v Four Millbank Nominees Ltd [1978] 2 All ER 557 stated on the issue of acceptance in unilateral contract: “Whilst the true view of a unilateral contract must in general be that the offeror is entitled to require full performance of the condition which he has imposed . . . there must be an implied obligation on the part of the offeror not to prevent the condition becoming satisfied. Until then the offeror revoke the whole thing, but once the offeree has embarked upon performance it is too late for the offeror to revoke his offer”.2 Consideration In the case of Currie v Misa (1875) LR 10 ex at 153 at 162, consideration is defined as follows: “Valuable consideration in the eyes of the law may consist either in some right, interest, profit, or benefit accruing to one party or some forbearance detriment, loss or responsibility given, suffered or undertaken by the other”.3 Consideration is the cause, prestation or promise of a thing service by the other. It is the price for a promise made and for a promise to be enforceable it must be supported by a consideration moving from the promisee. A reciprocal act or promise is regarded by law as sufficient and provides the essential ingredient to make a promise legally binding. The reciprocal act or promise involves two elements: an exchange and good consideration. The first element which is exchange gives rise to what is commonly known as the bargain theory of consideration that basically means there must be a reciprocal exchange. This theory magnified the latin tag quid pro quo. The case of Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92 CLR 424 recognized bargain as an essential element of a contract where Dixon CJ, Williams, Webb, Fullagar and Kitto JJ elaborated: “If we ask what we think is the real and ultimate question whether there is a promise offered in consideration of the doing of an act, as a price which is to be paid for the doing of the act, we cannot find such promise. No relation of quid pro quo between a promise and an act can be inferred. If we ask whether there is an implied request or invitation to purchase wool, we cannot say that there is. If we ask whether the announcement that a subsidy would be paid was made in order to induce purchases of wool, no such intention can be inferred.”4 In bilateral contracts it involves reciprocal promises sufficient to make a contract legally binding even in the absence of an act or deed by one or either party. What binds it legally is the promise of exchange and good consideration. In contrast, consideration in a unilateral contract constitutes a promise of an act rather than a promise since there is only one promise in said contracts. Generally, considerations move between the two parties in a contract but it shall be noted that the exchange element of the doctrine of consideration must move from the promisee but not necessarily from the promisor. However, Jordan CJ in Larkin at 368 said applying the law of longstanding: “There is a special class of case in which it is important to see whether there is a real consideration moving from the promisor. This is where the promise sought to be enforced is found to be a promise to do something which the promisor is already bound to do by a prior enforceable contract with the promise.”5 In this class of case, no contract is constituted by the promise, and there is nothing which either party can enforce by virtue of a new promise.6 It was held by Mason J in Wigan v Edwards: “. . .The general rule is that a promise to perform an existing duty is no consideration, at least when the promise is made by a party to a pre-existing contract, when it is made to the promise under that contract and it is to do no more than the promisor is bound to do under that contract. The rule expresses the concept that the new promise, indistinguishable from the old, is an illusory consideration.”7 Consideration can be anything stipulated by the promisor provided that it is not illegal and must in the eyes of the law exist. It need not be adequate as long as it is not illusory. Kirby J in Biotechnology Australia Pty Ltd v Pace (1988) 15 NSWLR 130 provides distinction between illusory terms and certain terms as follows: “. . . a promise to pay an unspecified amount of money is not enforceable where it expressly appears that the amount to be paid is to rest in the discretion of the promisor and the deficiency is not remedied by a subsequent provision that the promisor will, in this discretion, fix the amount of payment. Promises of this character are treated . . . not as vague and uncertain promises – for their meaning is only too clear – but as illusory promises. . .”8 In the same case McHugh JA further held: “It will be illusory if its payment or fulfillment depends upon an unfettered discretion vested in the promisor. Thus, a promise by the Commonwealth that it will pay a subsidy of an amount or at a rate determined by the Commonwealth from time to time is an illusory consideration.”9 Good consideration must be sufficient in law but need not be adequate as a matter of commercial exchange. In Biotechnology Australia Pty Ltd v Pace Kirby J contended that: “Contracts are agreements between the parties. Generally, their terms must be those which reflect the will of the parties objectively determined. The law of contract which underpins the economy, does not, even today, operate uniformly upon a principle of fairness. It is the essence of entrepreneurship that parties will act sometimes with selfishness. That motivation may or may not produce fairness to the other party. The law may legitimately insist upon honesty of dealings.”10 The following are additional rules that illustrate what does and what does not amount to good consideration: (1) Past consideration is no good consideration. However, the case of Pao On v Lao Yiu Long [1979] 3 WLR 435 provides an exception to the rule contending: “An act done prior to a promise can be good consideration in some cases if (a) the act done was done at the promisor’s request; (b) the parties understood that the act would be remunerated in some way, and (c) if the promise had been given in advance of the act.”11 (2) Merely performing an existing duty- doing what you are obliged to do – cannot be a good consideration. As pointed out by Lord Ellenborough in Stilk v Myrick 1809 2 Camp 317 that: “Promising or performing a duty you are already bound to the other party to perform is not good consideration for any promise he makes you. One good reason for this rule is to prevent contractual blackmail where a party threatens not to perform his contractual obligations unless he gets more consideration than was originally agreed to.”12 (3) Payment of a lesser sum. In Foakes v Beer (1884) 9 App Cas 605 it was held by Earl of Selborne LC citing the doctrine of Pinnels case: “Payment of a lesser sum on the day cannot be satisfaction for the whole sum. That is, payment of a lesser sum cannot be good consideration for a promise by the creditor not to claim the rest of the money due.”13 (4) The privity rule simply put it that only parties to a contract can enforce it. In the modern commercial context contracts mostly deals with executory consideration which consists of a promise to do something, an example of which is the promise to buy and sell. Aside from exchange and good consideration which are the essential elements of reciprocal promise there must be something of reliance. The case of Australian Woollen Mills is rendered authoritative in the case of Beaton v McDivitt where the approach on reciprocal promises is supplemented by a reliance based doctrine called estoppel. Estoppel is described by Sir William Blackstone as: “Estoppels . . . happen where a man hath done some act or executed some deed which estops or precludes him from averring anything to the contrary.”14 Estoppel is equitable in nature hence it is often referred to as equitable estoppel. The modern doctrine is described by Denning LJ in his judgment in Central London Property v High Trees [1947] KB contending that: “A promise must be honoured if (1) it was made with the intention of creating legal relations; (2) the promisor knew it would be acted upon by the promise, and (3) it was acted upon by the promisee to the promisee’s detriment. Estoppel in such a case could act as a defence to prevent the promisor acting inconsistently with the promise but would not found a cause of action – it was a shield rather than a sword.”15 The following are pre-conditions for promissory estoppel as established in Walton Stores (Interstate) Ltd v Maher (1988) 76 ALR 513 as held by Mason CJ and Wilson J :16 1. Promisor must make a promise; 2. Promisor must create to encourage an assumption that contract will come into existence or promise will be performed; 3. Promisee must rely on this to detriment; 4. Must be unconscionable, having regard to the promisor’s conduct, for the promisor to be free to ignore it. Provided further in John Burrows Ltd v Subsurface Surveys Ltd (1968) that: “Equitable estoppel cannot be invoked unless there is some kind of evidence that one of the parties entered into a course of negotiation which had the effect of leading the other to suppose that the strict rights under the contract would not be enforced. This implies that there must be evidence from which it can be inferred that the first party intended that the legal relations created by the contract would be altered as a result of the negotiations. It is not enough to show that one party has taken advantage of indulgences granted to him by the other.”17 Intention to Create Legal Relations In order for a contract to exist the agreement entered into by the contracting parties must have the intention to create legal relations generally evidenced by a consideration. Whether a subjective or objective approach should be taken in determining intent Mahoney JA noted in Air Great Lakes Pty Ltd v KS Easter (Holdings) Pty Ltd: “The existence of a contract is a consequence which the law imposes upon, or sees as a result of, what the parties have said and done. Actual subjective intention to contract is a factor which the law takes into account in determining whether a contract exists but it is not, or not always, the determining factor”.18 CONCLUSION A contract where the contracting parties did not do anything beyond furnishing promises to each other is binding and executory in a bilateral contracts, thus, a promise to be enforceable must be supported by a consideration moving from the promisee. Take into consideration the Shared Responsibility Agreement (SRA) between the Indigenous Communities and the Council of Australian Governments in its commitment to reconciliation, where the SRAs are constructed with reciprocal promises. “The Federal Government avoids calling SRAs legally enforceable agreements; however the Senate Select Committee on the Administration of Indigenous Affairs describes an SRA as a type of contract between members of the community to carry out certain agreed actions in return for an additional government benefit.”19 “Some legal and academic commentators suggest that SRAs are similar to a memorandum of understanding,20 or a good faith agreement designed to provide greater flexibility and responsiveness to individuals, families and communities, through a range of transactions concluded by mutual undertaking.”21 Therefore, a reciprocal promise constitute sufficient consideration and such is considered as good consideration in the modern commercial context. Furthermore, estoppel is effective only between the parties and proves without doubt as to the admission of the promisor. It provides only as a defence to claim made by the promisor in violation of a promise and it cannot be denied to the promisee or person to whom the promise was made. Read More